How do economists define "rationing"?

A) An individual believes that she would benefit greatly from a particular medical procedure, but she does not have health-insurance coverage and cannot afford to pay for the procedure with her own resources. Therefore, she goes without that procedure.

B) That individual does have a private health-insurance policy, but the insurer refuses to pay for the procedure, judging it not to be cost-effective. In plainer English, the insurer considers this procedure too expensive for the clinical benefit it promises. If such expensive procedures were to be covered, premiums for everyone would have to go up, which the insurer considers indefensible.

C) That individual is covered by a government-financed and –run health insurance program (e.g., Medicare for the elderly or Medicaid for the poor), and that public insurer refuses to pay for the procedure, judging it not to be cost-effective. The reasoning here is that general taxpayers should not be asked to purchase such an expensive procedure for this individual.

Which of these situations involved “rationing,” a word so dreaded by Americans? What are you taught in ECO 100: Introduction to Microeconomics that might help you answer this question?

Chances are that you are not being taught anything at all about this question. For some reason, most introductory textbooks do not cover the topic, and, therefore, most professors do not allude to it.

But let us consult two first-rate American economists who do instruct students on it in their textbook — my distinguished colleague economics professor Harvey Rosen and his equally distinguished Harvard colleague Michael Katz. In their textbook “Microeconomics,” the authors write:

“Prices ration scarce resources. If bread were free, a huge quantity of it would be demanded. Because the resources used to produce bread are scarce, the actual amount of bread has to be rationed among its potential users. Not everyone can have all the bread that they could possibly want. The bread must be rationed somehow; the price system accomplishes this in the following way: Everyone who is willing to pay the equilibrium price gets the good, and everyone who does not, does not.”

In this citation you will find the answer to my earlier question: All three situations involve rationing of health care. They merely represent different styles of rationing.

Introductory courses in economics should cover the topic of “rationing” explicitly and at some length, because the term triggers so much confusion and dishonest posturing in the realm of public policy. Just listen to the punditry on television or read the commentary in the print media.

A very common notion on “rationing” in our debate on health policy, for example, is that it occurs only when government stands somehow between what individual citizens may want and what they can have, even if with their own resources these individuals could never afford to purchase the item in question with their own resources.

Think of a diagnostic screening test that costs several hundred thousand dollars per life-year actually saved by this screening program. It could be so expensive because (a) few individuals being tested actually are at risk for the illness being diagnosed or (b) there are many false-positive test results that trigger extensive and expensive follow-up medical interventions, or both.

The administrators of a public insurance program — e.g., the Medicaid program for the poor — may decide that taxpayers cannot fairly be forced to purchase that highly expensive, saved life-year with their taxes, given other economic pressures on taxpayers and government budgets. Such a policy might easily trigger a public outcry with accusations that government is rationing health care.

Get the best of the ‘Prince’ delivered straight to your inbox. Subscribe now »

Remarkably, very often such critics countenance with equanimity situations in which the market prices low-income, uninsured individuals out of that very same diagnostic procedure. The idea seems to be that only governments ration anything, while private markets merely allocate scarce resources efficiently.

My colleagues Rosen and Katz certainly would not agree, nor should any properly trained economist.

Almost all desirable goods and services in an economy must be rationed somehow — either through the market or by government. One can have a lively debate on which of these approaches to rationing is “better.” It would be a highly subjective assessment, driven in good part by one’s ideology or position in the nation’s income distribution, or both. One’s assessment of these styles of rationing is likely to depend also on what item is to be rationed: Is it fashion jewelry, for example, or is it health care?

As you think about this proposition — if you will — you may want to search the internet for keywords such as “cost-effectiveness analysis” or “mammography for women under age 40” or “United States Preventive Services Task Force.” You will be surprised and dismayed by the debate these topics have triggered among seasoned adults.

Uwe E. Reinhardt is the James Madison Professor of Political Economy and a professor in the Wilson School. He can be reached at reinhard@princeton.edu.